6/11/2014

Art As An Asset

The NY Times takes a look as art as an investment as well as some who flip art for profit.The article states that given nearly $2 trillion worth of art is held in private hands, there is ample opportunity for financial opportunities. One economist mentioned that art is an asset, but given that art categories as well as individually pieces perform differently and is not regulated, it should not be considered an asset class.

The article continues with "the art market’s opacity, volatility, lack of regulation and reliable data are frequently cited as other reasons why investors prefer stocks and bonds to paintings"'. But in many instances in addition to a return, depending upon the artist typically below that of the S&P 500, collector/investors can also enjoy the work.

The NY Times reports

LONDON — The “Role of Art in Growing Your Wealth”; “Viability of Art as an Investment”; “Next Wave of Growth in the Art Market — Institutional Roles.”

These were just a few of the session titles at the London Business School’s eighth annual Art Investment Conference, held at the Royal College of Nursing on May 30. Once again the multibillion-dollar question was asked: Can art be treated as a financial investment like stocks and bonds? The keynote speaker, Anna Dempster, an economist and a senior lecturer at Sotheby’s Institute of Art, said the art world “continues to go from strength to strength” and that art as an asset class presented “significant opportunities” at a time when an estimated $2 trillion of artworks are currently held in private hands.

The art market is indeed expanding. Last year, 47.4 billion euros, or about $64.6 billion, of art and antiques were sold by the world’s auction houses and dealers, an increase of more than 150 percent over the last decade, according to data compiled by the European Fine Art Foundation. This expansion has in turn created a desire to treat art as another branch of finance. Sotheby’s Institute and Christie’s Education run thriving “art business” courses, and there’s been a proliferation of funds that try to attract investment into collections of artworks, as well as other art-related investment schemes — not to mention conferences.

But the business of art faces an ongoing problem. Wealthy collectors can make handsome returns by buying works by the most sought-after contemporary artists from dealers, holding on to them for a few years, or even months, and then selling them for double- or triple-digit profits at auction. Why give your money to a middleman or an art fund, when you can make so much more by buying the stuff yourself, and also have the pleasure and prestige of living with these works in the meantime?

American hedge fund managers such as Steven A. Cohen, Daniel S. Loeb, Glenn R. Fuhrman and Adam D. Sender have, as private individuals with the help of a single, carefully selected adviser, sunk millions into their contemporary art collections. But their companies, which are part of a $2.5-trillion hedge fund industry, don’t formally offer that investment model to their clients. Major institutional investors such as banks, private equity and pension funds remain wary of “emotional” assets like paintings and sculptures, and private investors have been reluctant to risk locking up their money in illiquid specialist art funds. The Art Newspaper estimated in October that “at best” there remained just 20 of these art funds active worldwide. There had been 53 announced as of December 2008, according to Sergey Skaterschikov’s “Skate’s Art Investment Handbook,” published in 2010. The fund model has been promoted as a means of reducing risk in art investment, but the funds themselves have proved a risky investment.

“Art is an asset, not an asset class,” said Luke Dugdale, the director of the Royal Bank of Canada’s British-based private client wealth management division, who participated on a panel at the conference. Economists define an asset class as a group of investments that behaves in a similar way in the marketplace. “If it were an asset class, the F.C.A. would regulate it,” Mr. Dugdale added, referring to the Financial Conduct Authority. “And that would kill the art world. It’s a market in which everyone can be an adviser.” Fellow panelists in Mr. Dugdale’s session suggested there are currently as many 300,000 art advisers operating worldwide.

Most academic studies (and there have been plenty on this subject) calculate that over the long term art is an investment that yields about 4 percent per year, not including auction house transaction costs. The S&P 500 index of stocks has had a comparative long-term yield of more than 6 percent, and has also provided income through dividends. The art market’s opacity, volatility, lack of regulation and reliable data are frequently cited as other reasons why investors prefer stocks and bonds to paintings.

“An asset class generates a return on investment, whereas with art the dividend is visual,” said the London-based writer, curator, collector and self-confessed “flipper,” Kenny Schachter, who wrapped up the London conference. “But if you buy art low and sell high, you can make extraordinary money.”

There were any number of spectacular “flips” to be seen at last month’s $1.6 billion series of postwar and contemporary auctions in New York. The young American artist Israel Lund, for example, creates canvases resembling Gerhard Richter’s abstract paintings with most of the paint scraped off. Mr. Schachter said that these could be bought from dealers for less than $10,000 a year ago. Three of them, all dated 2013, sold for auction prices between $100,000 and $125,000 in May.

“Flipping art is a form of greed,” said Mr. Schachter, “but only 10 percent of the flips make that kind of return and they get all the media attention. It’s still a fickle market.”

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The Appraiser Workshops blog was developed in 2008 to publish news connected with the personal property profession and to promote the Appraiser Workshops. Content includes appraisal ideas and tips, industry news and events, market trends and updates, surveys, educational opportunities and general commentary about personal property appraising. Visit often. Comments, news, suggestions and content contributions are always welcome.

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Todd W. Sigety, is a certified member of the International Society of Appraisers and is a partner in the Appraiser Workshop, developers of the Good, Better, "Best" Appraiser Workshop. He owns two Antique galleries in Old Town Alexandria, VA where the workshop is held. He currently serves as the President on the National Board of Directors for the International Society of Appraisers. He is also the creator and editor of the Journal of Advanced Appraisal Studies.

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